Is LIC bailing out debt-laden private entity IL&FS?

Incorporated in 1987, IL&FS was ex-Citibanker Parthasarathy's brainchild and was initially promoted by the Central Bank of India, Housing Development Finance Corporation Limited and Unit Trust of India (UTI).

The Life Insurance Corporation of India (LIC) has long been called upon to rescue debt-ridden public enterprises, but could it just have bitten off more than it can chew? Even before its acquisition deal with the troubled IDBI Bank has concluded, the buzz is that India's largest insurer is stepping in to rescue Infrastructure Leasing & Financial Services (IL&FS) too.

According to Moneylife, this could end up as one of the biggest bailouts in the financial sector. Because the unlisted behemoth with a vast number of subsidiaries - some of which have recently been downgraded by ratings companies - boasts a giant load of debt, the full details of which are not easily available in the public domain.

Ravi Parthasarathy, who steered the company for nearly three decades resigned as chairman last week on health grounds, and a member of LIC's top brass has quickly stepped into his shoes. LIC's managing director and its nominee on IL&FS' board Hemant Bhargava was unanimously elected to the chairman's post at a board meeting last Friday. LIC owns about 25 per cent stake in IL&FS and is its largest shareholder.

The buzz is that LIC may now be called upon to invest more in IL&FS in light of its proposed Rs 4,500-crore rights issue - already approved by the infrastructure developer and financier's board. The debt-ridden company reportedly also plans to seek liquidity support of Rs 3,500 crore from its shareholders for working capital.

According to the magazine, this means that LIC will have to invest over Rs 1,000 crore in line with its equity holding, and if it does so, it would essentially be bailing out a private entity, with some public shareholding.

It is worth mentioning here that back in 2015, Ajay Piramal, Chairman of Piramal Enterprises and the astute investor likened to Warren Buffet, had shown interest in taking control of IL&FS but had ultimately backed out. The company's debt levels were raising eyebrows even then. In fact, the report said that IL&FS' consolidated long term borrowings have snowballed from Rs 48,648 crore in March 2015 to Rs 59,764 crore in March 2017.

Moreover, the company had reported a net loss in two of the past three years for which data is available - a loss of nearly Rs 66 crore in March 2015, which grew more than twofold to Rs 174.43 crore a year later. Although the company reported a profit of Rs 43.20 crore in March 2017, its standalone net cash flow from operating activities have persistently stayed in the red right since March 2011.

Incorporated in 1987, IL&FS was ex-Citibanker Parthasarathy's brainchild and was initially promoted by the Central Bank of India, Housing Development Finance Corporation Limited and Unit Trust of India (UTI). The likes of SBI, LIC, ORIX Corporation Japan, and Abu Dhabi Investment Authority (ADIA) picked up stakes in the company in the 1990s.

Through the decades that Parthasarathy steered the company - without a fixed tenure or re-appointment - IL&FS was run in the mould of National Stock Exchange (NSE), Stockholding Corporation of India and other private, so-called "professionally managed" unlisted companies. Although the bulk of the shareholding in these companies was held by public sector undertakings, they were run like private sector companies with similar perks and privileges. Furthermore, IL&FS did not come under the oversight of a single regulator, or central audit and vigilance agencies, apart from being designated as a systemically-important, non-banking finance company by the RBI.

It is speculated that with Parthasarathy's resignation - incidentally without any succession planning - details of his gargantuan but shadowy empire may become available to the public. The fact that IL&FS' many subsidiary companies also boast large investments from public sector banks and institutions only makes its financials even more complex to unravel. Many of them are loss-making, too. Ratings agencies have downgraded the debt of IL&FS Transportation Networks Limited. IL&FS Engineering and Construction has been making losses consistently.

"We are in the middle of implementing our plans. We would be happy to share once consummated," IL&FS's vice chairman and managing director Hari Shankaran told Moneylife when asked to comment on the debt figures mentioned above. That's pretty cryptic but the group has reportedly been trying to trim its debt in the past year by way of major refinancing drives and selling assets. For instance, IndusInd Bank recently acquired its securities arm, IL&FS Securities Services Ltd.

The big question is whether LIC can afford to play knight in shining armour to IL&FS currently, when its own bad loans are beginning to mount? LIC's gross NPAs as percentage of its debt portfolio has jumped from 4.73 per cent in FY17 to 6.23 per cent in the last fiscal.